Apple Told by Jury to Pay $532.9 Million in Patent Trial

Apple Inc. was told to pay $532.9 million after a federal jury said the company’s iTunes software used a Texas company’s patented inventions without permission.

Closely held Smartflash LLC, which claimed that Apple infringed three patents, was seeking $852 million in damages, while Apple said it was worth $4.5 million at most. A federal jury in Tyler, Texas, where Smartflash is based, on Tuesday rejected Apple’s arguments that it didn’t use the inventions and that the patents were invalid.

The dispute is over digital rights management and inventions related to data storage and managing access through payment systems. Smartflash claimed that iTunes used the inventions in applications such as Game Circus LLC’s Coin Dozer and 4 Pics 1 Movie. Apple pledged to appeal.

“Smartflash makes no products, has no employees, creates no jobs, has no U.S. presence, and is exploiting our patent system to seek royalties for technology Apple invented,” said Kristin Huguet, an Apple spokeswoman. “We refused to pay off this company for the ideas our employees spent years innovating and unfortunately we have been left with no choice but to take this fight up through the court system.”

Game Circus and another game developer, KingsIsle Entertainment Inc., maker of Wizard 101 and Grub Guardian, had also been defendants before they were dismissed from the case last year.

Sales Percentage

In asking for $852 million, Smartflash argued it was entitled to a percentage of sales of Apple’s devices, including the iPhone, iPad and Mac computers, that were used to access iTunes. It claimed that Apple had intentionally infringed the patents, in part because one of its executives had been given a briefing on the technology more than a decade ago.

“Apple doesn’t respect Smartflash’s inventions,” the company’s lawyer, John Ward of Ward & Smith in Longview, Texas, told the jury. “Not a single witness could be bothered with reviewing the patent.”

Cupertino, California-based Apple attacked every aspect of Smartflash’s case. It said the patents were invalid and weren’t infringed. It said Smartflash didn’t have complete control of the patents and waited too long to file suit. It also argued that Smartflash’s royalty demands were “excessive and unsupportable.”

“They are not just invalid, they are invalid many times over,” James Batchelder a lawyer at Ropes & Gray in East Palo Alto, California, who is representing Apple, told the jury.

Commercializing Ideas

Smartflash was started in the early 2000s by inventor Patrick Racz in an effort to commercialize his ideas. At one point, Racz was offered less than $200,000 for an interest in one of his patents, according to a court filing.

Racz met with executives of what is now Gemalto SA, including Augustin Farrugia, now a senior director at Apple, according to the complaint. Farrugia, a long-time specialist in digital rights management, is Apple’s director of security and designed the national banking system for Singapore in the 1990s.

Smartflash doesn’t make any products and its only business is licensing seven patents issued between 2008 and 2012, which Racz co-invented. Its address is a suite in an office building across the street from the courthouse where the trial was held.

“The jury was very attentive, took good notes and worked very hard,” Ward said after the verdict was announced. “We think they got it right.”

Apple had sales of $18 billion for iTunes, software and services last fiscal year, about 10 percent of its revenue.

Paying Royalties

Another Apple lawyer, Eric Albritton of the Albritton Law Firm in Longview, told the jury there was no reason for Apple to pay royalties on the price of a phone when the dispute is over a single feature.

“It doesn’t make a lick of sense that one person would buy an iPhone and not make calls,” he told the jury. “People do not buy cell phones for the sole purpose of using apps.”

Apple has had success in getting big damage awards from Texas juries tossed. A $625.5 million verdict in 2011 over a way to display documents was thrown out by the trial judge in a decision later upheld by an appeals court.

Last year, the same appeals court, which specializes in patent law, rejected the way damages were calculated in a $368.2 million decision won by Virnetx Holding Corp. and ordered a review under rules that will mean a lower payout.

The VirnetX decision, along with other appeals court rulings over how damages are calculated in patent cases, will be used by Apple in its arguments to have this damage award reduced, if it’s unsuccessful in getting the infringement verdict overturned.

Smartflash also has sued Apple’s chief smartphone rival, Samsung Electronics Co. A trial in that case is to be scheduled now that the Apple trial is over. Google Inc., which also was sued by Smartflash, is trying to have its case transferred to a court in California. Amazon.com Inc. was sued in December, also in Texas.

The case is Smartflash LLC v. Apple Inc., 13-447, U.S. District Court for the District of Texas (Tyler).

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